How the EU is downscaling its key sustainability legislation

The EU's ambitious sustainability agenda is undergoing a rapid and profound recalibration. The clear shift moves beyond broad regulatory expansion to prioritise simplification, postponement and reduced compliance scope. 

This legislative objective - to minimise administrative friction and enhance competitiveness - is evident in key acts such as the Corporate Sustainability Due Diligence Directive (CSDDD), Corporate Sustainability Reporting Directive (CSRD), Deforestation Regulation (EUDR) and Sustainable Finance Disclosure Regulation (SFDR).

Scaling back due diligence and reporting

The Omnibus discussions have resulted in legislative thresholds being sharply increased, which dramatically shrinks the number of companies subject to sustainability rules. Through an alliance between the dominant center-right EPP and far-right groups, the European Parliament (EP) adopted its final negotiating position on the Omnibus package, increasing the compliance thresholds for both CSRD and CSRDDD. Specifically, the CSRD now applies only to companies with 1,750 employees and 450 million EUR turnover. For the CSDDD, the scope is restricted only to the largest firms, with thresholds spiking to 5,000 employees and 1.5 billion EUR turnover. 

This position was met with sharp criticism for prioritising political gain over the Green Deal. Crucially, the EP also voted to eliminate the mandatory requirement for companies to adopt climate transition plans aligning their business models with the Paris Agreement. Furthermore, the vote moved civil liability for non-compliance away from the common EU level, relying on national member states. This position now serves as the EP's final mandate to begin trilogue negotiations with the Council of the EU and the European Commission, with the aim of finalising the legislation by the end of 2025.

Strategic delays in deforestation rules

The Council of the EU has adopted a negotiation mandate for a targeted revision of the EUDR, proposing a significant postponement of application dates. New deadlines are 30 December 2026 for medium and large operators, and 30 June 2027 for micro and small operators. 

In a move to simplify the regulation, the burden for submitting the due diligence statement falls exclusively on the operator who first places the product on the EU market, relieving downstream operators and traders. Small operators will benefit from a simpler process, allowed to file a one-off declaration and use postal codes for traceability instead of detailed geolocation data. Following heavy lobbying by companies and trade partners, the Council is also calling for a full 'simplification review' by April 2026, to assess the regulation's administrative burden. 

New fund categories introduced

The European Commission (EC) has proposed a major overhaul of the SFDR intending to simplify disclosures, reduce compliance burdens and combat greenwashing. 

The key structural change involves replacing the existing Article 8 and 9 classifications with three new product categories: 
1.    Sustainability Objective: requires at least 70% of assets in 'sustainable economic activities' and excludes investments in expansive fossil fuel companies; 
2.    Transition: requires ≥70% assets to be linked to measurable transition objectives;
3.    Integration: focuses solely on strong ESG performance.

The proposal also introduces significant cost relief by scrapping entity-level disclosures on Principal Adverse Impacts (PAIs), a move estimated to cut recurring costs by 25% or 56 million EUR annually. Product-level disclosures will be streamlined and aligned with CSRD data. This overhaul is ultimately designed to end the misuse of Articles 8 and 9 as de facto 'labels' and ensure a single, unified EU approach to sustainable finance products. 

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